Instant Shareholder Value, Just add Debt

CrownThomas's picture

Courtesey of the federal reserve's attempts to push the market around, treasury yields across the entire curve are well below their mean. This is leading to a gross misallocation of capital, which as usual is largely ignored by the mainstream media.

How are companies taking advantage of these low rates? They certainly aren't borrowing in order to invest in the future. Not with the level of CapEx we're seeing. What they are doing is focusing on is short term gratification as ZH has pointed out many times in the past.

One glaring example of this short sighted vision is dividend recaps. Corporations borrow funds, then turn around and pay shareholders in the form of dividends. This should be a red flag to anyone paying attention, as it is a clear indication that companies apparently can't identify any projects worth investing in that will create future shareholder value.

So how are companies creating shareholder value if they aren't investing in CapEx (and thus a steady stream of future cash flows)? Why, they're adding debt of course. And lots of it -- just to turn around and give a one time cash benefit to shareholders.

To summarize, companies can't figure out how to cover an ever decreasing cost of capital by way of CapEx, so they're borrowing on the cheap and giving a one-time benefit to the shareholder (Einhorn picked the wrong company). This may paint a gloomy picture if you understand what's going on here, but the humor can be found in listening to the pundits wonder why nobody is buying the "market is cheap" argument.


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ebworthen's picture

What companies are trying to do is get investors and hedge funds to chase their dividend - buy the stocks of the company to float the equity valuation - so the insiders can sell and take profit.

It is bubble blowing because that is all that is left; bubble blowing, sector churning and rotation lolapalooza that maintains fees, charges, taxes on profits, and anything but investing in new ideas or employees.

Stuck on Zero's picture

It has nothing to do with putting cash in the pockets of the shareholders.  It has everything to do with putting huge bonuses in the pockets of the CEO.


Shizzmoney's picture

Just wait until shareholders and unions figure out that in fact, the corporations they are "suing", don't actually have the money.

That's gonna be a lulzy conversation in boardrooms (and courthouses) across America. 

#bullish on lawyers

Shizzmoney's picture

It's financial apartheid that a corporation can over leverage itself 100x's at near 0-3% interest, yet *we the people* get scrutinized when we go 1x-3x's more in debt (at 15-35% interest).

What's funny is my company has used this access to cheap money (via JPM) to buyback shares and acquire other corporations (instead of giving us bonuses or raises). 

The funny part is one of those companies is in the UK, where the economy is about to implode. 

Jokes on you, bitchez!

freecrafted's picture

Yeah because your company doesn't have a million other people who would gladly take your spot if you've got a problem with that.

NeedleDickTheBugFucker's picture

You could roll the charts back even further to the early '80s and the beginning of the greatest bull market in history as a result of the Reagan "economic miracle".  In reality, the catalyst was the beginning of the debt super cycle as the U.S. (and the world) decided to "lever-up" as interest rates peaked.  Here is the change in U.S. total credit market system debt outstanding.

January 1981 - $4.826 trillion or 82.1% of GDP

January 2000 - $25.858 trillion or 235.0% of GDP

July 2012 - $55.309 trillion or 408.2% of GDP

Mi Naem's picture

Loading up with manageable long term debt at a low fixed rate of interest as we continue into accelerating inflation seems like a wise course to take.  That window of opportunity may close at any time, and I'm not sure we'll get much warning.  I pay them with dollars today, and pennies on that dollar tomorrow.  What's wrong with that?

freecrafted's picture

Might as well drive down the cost of equity capital. Inflation of asset prices always comes before broad inflation spikes especially when you have high unemployment keeping a lid on wage inflation(obviously because if you're an employer why would you grossly increase your own workforces income when you can just give another unemployed person a job without giving that guy any wage increases either?).

Drive down the cost of equity capital and if and when equity prices are sky high you can issue shares at very low cost of capital and build up another stock pile of cash with cheap(from their point of view) equity. 

wonderatitall's picture

wont borrow and spend like a gubmint type.....drone them

pitz's picture

Nothing wrong with debt, especially long term debt issued at inflated prices.  I'd rather be an issuer of long-term fixed rate debt, than an owner (ie: Apple's alleged "cash" hoarde). 

freecrafted's picture

Agreed! This is actually a smart move and only shows the relative value of equities vs. the bond market. By doing this they can increase their stock price and drive down the cost of their equity capital.

I would do the same in their position although I would make sure that as my credit position detiorated from more bond issuance, I would stock pile more cash because I'm shutting down my access to future liquidity in the process. Wait they're doing that, too. And I would make sure that if this is going to be my bond issuance jubilee(preferring to take these rates than rates in the future) I better obtain enough cash to finance operations for many, many years because I'm not going back to the bond market if rates rise. Wait they're not blowing their wads of cash either!

Gee how about that?


P.S. I'm new to posting, but are these top bar posts where the slightly saner people hang out because sometimes I wonder if a lot of the posters here can even understand some of the stuff that 50+ Tyler Durden's write.

bank guy in Brussels's picture

ZeroHedge really has two main threads.

The top three horizontal posts are from that second thread, which you can access by clicking on the 'Contributors' title - many people miss the posts there because they don't realise how to access the other articles that are no longer on the page header 'top 3'

There is great stuff there, but also some really crazy and wrong people sometimes too ... so it is not necessarily 'saner' people ... It is stuff that is directly posted by non-Tyler, and usually specifically identified, individuals

Everyone has their favourites ... but even with the people who are really goofy and wrong, it is fun to look at their articles because the comment sections can get pretty hilarious

A great place overall, with 'diverse' opinions, ha!

ihedgemyhedges's picture

You can reduce/eliminate your dividend.  Try doing that with your coupon/principal payment when rates are much higher in the "long term"........